Josh Kopelman

Managing Director of First Round Capital.

espite being coastally challenged (currently living in Philadelphia), Josh has been an active entrepreneur and investor in the Internet industry since its commercialization. In 1992, while he was a student at the Wharton School of the University of Pennsylvania, Josh co-founded Infonautics Corporation – an Internet information company. In 1996, Infonautics went public on the NASDAQ stock exchange.

Monthly Archives for 2010

Over the last few years, I have read a numberofgreatposts describing how to run a board of directors meeting. They give wonderful advice on how to get the most value out of your board meetings.

One thing I've seen pretty consistently is that there is a direct correlation between the success of a board meeting and the quality of preparation in advance of the meeting.

Planning for a successful board meeting is not easy – it
takes a lot of time to effectively provide insight into the company’s
priorities, goals, performance, and challenges. And time is a scarce resource at any startup. When I was CEO of Half.com, I had a wonderful
board of directors – they offered real strategic input and guidance. However, I believe that half of the value of
a Board of Directors meeting comes in advance of the meeting. The time I spent with my management team
preparing for the board meeting was invaluable. It insured we were all on the same page. It provided an unque opportunity for the management team to step
outside of the daily operational (aka firefighting) mode and think
strategically. Looking back, some of the
most important decisions we made resulted from conversations while we were preparing for our board
meeting, rather than in the meeting itself. Our monthly board meeting provided a firm benchmark to measure our
progress by – and also served as an invaluable “motivator” to ensure that we
achieved the expectations that were set at the last meeting.

I believe that companies that don’t invest the time
preparing for a board meeting are missing out on a lot of value…

Restaurant owners understand the power of the press -- and go to extreme efforts to ensure that influential customers have a wonderful experience. This isn't rocket science -- it's good business!

Why is it that online businesses don't do the same? They should! One of the first things we did after we launched Half.com was create a VIP list, containing the email addresses of all influential reporters, competitors, potential acquirers, analysts, and investors. (Bloggers didn't exist back then - but they would qualify as well). We then had our system alert us whenever a VIP created an account, purchased an item or listed one for sale. When a VIP purchased a CD we'd have someone from our customer service group telephone the seller to confirm that it shipped promptly. When a VIP listed an item for sale, we'd monitor it to see if it sold. And if a (hypothetical) reporter listed a (hypothetical) book for sake, and it didn't sell quickly, a relative of a (hypothetical) Half.com employee in Oklahoma might (hypothetically) purchase the item...Resulting in a (hypothetical) story in the New York Times.

Half.com offers a good service -- just like most restaurants serve good food. But, doesn't it make sense to be on your best behavior with influential customers?

As a little kid, I always lost when I played musical
chairs. Maybe I wasn't fast enough or big enough -- or perhaps I just was
enjoying the music so much that I failed to anticipate when it would
stop. In the three businesses I've been involved in founding, I've been lucky enough to catch a chair right before the music stopped.

I recently returned from Etech (O'Reilly's Emerging Technology Conference) where, just like at the last fall's Web 2.0 Conference, I participated in several discussions about whether Web 2.0 is a bubble -- and if so, when it might burst. I'll leave that topic for a future post...But, regardless, I think that it is very important for entrepreneurial
CEO's to always be on the look out for signs that the "music may be
stopping" - and make sure that their company is well-positioned for
it. The funding (and M&A/IPO) market for startups is cyclical. What can
you do to better position you to "grab a chair" if you hear the music
stopping?

Focus on adapting to change rather than predicting the future.

I've seen a ton of business plans over the last few years
-- they all only had one thing in common: they all were wrong. Most
understated costs and overstated revenues - a few actually beat their
projections. But if you look at their five year forecasts, every single
business plan was wrong. A business plan is a document that outlines your
plans and assumptions at a specific moment in time – it is your prediction of
the future based on what you know now. As soon as you hit print on the
business plan, things change. Competitors emerge. Technologies
shift. Regulatory changes effect your marketplace. Key employees
quit. Macro-economic factors impact customer spending. Shit
happens. I'd much rather invest in a founding team that shows an ability
to adapt to change than one that claims to accurately predict the future.
I believe that teams that are nimble, market-focused, and are willing to
rapidly test/iterate/shift their plans are more apt to perceive the signals
that the music may be stopping.

Understand the unwritten term in the term sheet.Almost
every entrepreneur I talk to strives to get the
highest valuation humanly possible. And
often that is a valid desire. However,
entrepreneurs should understand the “unwritten term in the term
sheet”: few VC’s will willingly part with a “winning company (ie, a
company
that is executing/performing well) for less than a 10x return. Peter
Rip of Leapfrog Ventures highlights the tradeoff:

”Lots of cheap capital, available at high valuations
seems great, until you do the exit math. Raise $8M at $12M pre-money and your
post-money valuation is $20M. Your investors want to sell for $200M. Raise $2M
at $4M pre- and your investors get the same rate of return at $60M. But a $60M
exit is 10X more likely than $200M. Few VCs will write the $2M check these days,
precisely because a $20M return doesn’t move the needle in a $500M fund. That’s
why valuations are moving up – the need to invest more money – not the
intrinsic value of startups. Higher valuations and high venture rounds may feel
good in the short term, but with IPOs as scarce as they are, they can price you
out of the very exit you seek.”

There are often good reasons for taking a lot of money at
a high valuation. However, I’ve found
that all too often the entrepreneur did not fully understand the deal that they
were making – specifically, they did not explicitly accept the fact that they
were eliminating options for a shorter term exit. Again, there are plenty of good reasons to
“swing for the fences” and raise a large round at the highest valuation
possible – just make sure you've agreed to the trade-off.

Build to last – with options.I, like Ed Sim, believe that companies are not sold. They’re bought.

In every exit I’ve been fortunate enough to participate
in – both big (Half.com or Infonautics) and small (Turntide, del.icio.us, Vamoose.com, e-Touch or
Snapcentric) – the opportunity to exit was there only because we had begun to
build a company that has differentiated technology, a strong team, offers
customers real value, demonstrates traction in the marketplace, and/or solves a
real need for the acquirer. You can’t
build a company to sell it – I’ve never seen it work.

That said, I sometimes see entrepreneurs draw the wrong
message from the “Built to Last” story. They believe that in order to build a company for the long term you need
to make long-term commitments in short term. They enter into long term leases. They hire too many people too fast. They overspend on hardware. They
lock into a product development roadmap without an iterative
development/alpha/beta process. They
sign long-term strategic partnerships before their model is fully baked. I’ve heard people justify doing all of these
things under the “we’re in this for the long haul” rationale. However, I believe that the best way to
insure that there is a long haul is to maintain flexibility. Things change. Mistakes are made. Keep your options open – including the option
to look for a chair when you think the music is going to stop.